Chapter

Completing the
Accounting Cycle
Financial Accounting, IRFS
Weygandt Kimmel Kieso
Slide
4-1

Study
Study Objectives
Objectives
1.

Prepare a worksheet.

2.

Explain the process of closing the books.

3.

Describe the content and purpose of a post-closing trial

balance.

4.

State the required steps in the accounting cycle.

5.

Explain the approaches to preparing correcting entries.

6.

Identify the sections of a classified statement of

financial position.

Slide
4-2

Completing
Completing the
the Accounting
Accounting Cycle
Cycle

Using a
Worksheet

Closing the
Books

Steps in
preparation

Preparing closing
entries

Preparing
financial
statements

Posting closing
entries

Preparing
adjusting entries

Preparing a postclosing trial

balance

Summary of
Accounting
Cycle

Classified
Statement of
Financial
Position

Reversing entries
An optional
step

Intangible assets

Correcting
entriesAn
avoidable step

Long-term
investments

Property, plant,
and equipment

Current assets
Equity
Non-current
liabilities
Current liabilities

Slide
4-3

Using
Using A
AWorksheet
Worksheet
Worksheet
A multiple-column form used in preparing financial
statements.
Not a permanent accounting record.
Five step process.
Use of worksheet is optional.

Slide
4-4

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 4-1

Slide
4-5

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration:

Slide
4-6

Illustration 4-2
Preparing a trial balance

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
1. Prepare a Trial Balance on the Worksheet

Trial balance amounts come

directly from ledger accounts.
Include all accounts
with balances.

Slide
4-7

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

Slide
4-8

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
2. Enter the Adjustments in the Adjustments Columns
(a)
(b)

(d)

(d)
(g)

(e)

(a)
(b)
(c)
(e)
(f)

(c)

(f)
(g)

Slide
4-9

Adjustments Key:
(a) Supplies Used.
(b) Insurance Expired.
(c) Depreciation Expensed.
(d) Service Revenue Earned.
(e) Service Revenue Accrued.
(f) Interest Accrued.
(g) Salaries Accrued.

Enter adjustment amounts, total

adjustments columns,
and check for equality.

Add additional accounts as needed.

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
3. Complete the Adjusted Trial Balance Columns
(a)
(b)

(d)

(d)
(g)

(e)

(a)
(b)
(c)
(e)
(f)

(c)

(f)
(g)

Slide
4-10

Total the adjusted trial balance

columns and check for equality.

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement Columns
(a)
(b)

(d)

(d)
(g)

(e)

(a)
(b)
(c)
(e)
(f)

(c)

(f)
(g)

Slide
4-11

Extend all revenue and expense account

balances to the income statement columns.

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
4. Extend Amounts to Financial Statement Columns
(a)
(b)

(d)

(d)
(g)

(e)

(a)
(b)
(c)
(e)
(f)

(c)

(f)
(g)

Slide
4-12

Extend all asset, liability, and equity account

balances to the statement of financial position
columns.

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
5. Total Columns, Compute Net Income (Loss)
(a)
(b)

(d)

(d)
(g)

(e)

(a)
(b)
(c)
(e)
(f)

(c)

(f)
(g)

Slide
4-13

Compute Net Income or Net Loss.

SO 1 Prepare a worksheet.

Steps
Steps in
in Preparing
Preparing aa Worksheet
Worksheet
Review Question
Net income is shown on a worksheet in the:
a. income statement debit column only.
b. statement of financial position debit column only.
c. income statement credit column and statement of
financial position debit column.
d. income statement debit column and statement of
financial position credit column.
Slide
4-14

SO 1 Prepare a worksheet.

Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet

Worksheet
Income statement is prepared from the income
statement columns.
Statement of financial position and retained earnings
statement are prepared from the statement of
financial position columns.
Companies journalize and post adjusting entries.

Slide
4-15

SO 1 Prepare a worksheet.

Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Slide
4-16

SO 1 Prepare a worksheet.

Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Slide
4-17

SO 1 Prepare a worksheet.

Preparing
Preparing Financial
Financial Statements
Statements from
from aa Worksheet
Worksheet
Illustration 4-4

Slide
4-18

Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
Worksheet

Adjusting Entries
The adjusting entries are prepared from the
adjustments columns of the worksheet.
Journalizing and posting of adjusting entries follows
the preparation of financial statements when a
worksheet is used.

Slide
4-19

SO 1 Prepare a worksheet.

Preparing
Preparing Adjusting
Adjusting Entries
Entries from
from aa Worksheet
Worksheet
Illustration 3-22
General journal
showing adjusting
entries

Adjusting
Journal
Entries
(Chapter 3)

Slide
4-20

SO 1 Prepare a worksheet.

Closing
Closing the
the Books
Books
At the end of the accounting period, the company makes
the accounts ready for the next period.
Illustration 4-5

Slide
4-21

SO 2 Explain the process of closing the books.

Closing
Closing the
the Books
Books
Closing entries formally recognize, in the general
ledger, the transfer of
net income (or net loss) and
dividends
to Retained Earnings.
Closing entries are only at the end of the annual
accounting period.

Slide
4-22

SO 2 Explain the process of closing the books.

Closing
Closing the
the Books
Books

Note:
Dividends are closed directly
to Retained Earnings and
not to Income Summary
because Dividends are not
an expense.

Slide
4-23

Illustration 4-6

Retained Earnings is a
permanent account; all
other accounts are
temporary accounts.

SO 2

Closing
Closing the
the Books
Books
Illustration 4-7
Closing entries
journalized

Closing
entries
need to
be
posted

Slide
4-24

Closing
Closing the
the Books
Books
Illustration 4-8
Posting of
closing entries

Posting
closing
entries

Slide
4-25

Preparing
Preparing aa Post-Closing
Post-Closing Trial
Trial Balance
Balance
Purpose is to prove the equality of the permanent account
balances after journalizing and posting of closing entries.

Temporary
accounts
will have
zero
balances.

Illustration 4-9
Slide
4-26

SO 3

Slide
4-27

Summary
Summary of
of the
the Accounting
Accounting Cycle
Cycle
Illustration 4-12

1. Analyze business transactions

Slide
4-28

9. Prepare a post-closing trial

balance

2. Journalize the transactions

8. Journalize and post closing

entries

3. Post to ledger accounts

7. Prepare financial
statements

4. Prepare a trial balance

6. Prepare an adjusted trial

balance

5. Journalize and post

adjusting entries

SO 4 State the required steps in the accounting cycle.

Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
Correcting entries
are unnecessary if the records are error-free.
are made whenever an error is discovered.
must be posted before closing entries.
Instead of preparing a correcting entry, it is possible to
reverse the incorrect entry and then prepare the correct entry.

Slide
4-29

SO 5 Explain the approaches to preparing correcting entries.

Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
Illustration (Case 1): On May 10, Mercato Co. journalized and
posted a $50 cash collection on account from a customer as a
debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer paid
the remaining balance in full.
Incorrect
entry

Cash

Correct
entry

Cash

Correcting
entry
Slide
4-30

50

Service revenue

50
50

Accounts receivable
Service revenue
Accounts receivable

50
50
50

SO 5 Explain the approaches to preparing correcting entries.

Correcting
Correcting EntriesAn
EntriesAn Avoidable
Avoidable Step
Step
Illustration (Case 2): On May 18, Mercato purchased on account
office equipment costing $450. The transaction was journalized
and posted as a debit to Delivery Equipment $45 and a credit to
Accounts Payable $45. The error was discovered on June 3.
Incorrect
entry
Correct
entry
Correcting
entry
Slide
4-31

Delivery equipment

45

Accounts payable

45

Office equipment
Accounts payable

450

Office equipment
Delivery equipment
Accounts payable

450

450
45
405

SO 5 Explain the approaches to preparing correcting entries.

Slide
4-32

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position
Presents a snapshot at a point in time.
To improve understanding, companies group similar
assets and similar liabilities together.

Standard Classifications
Assets

Illustration 4-17

Equity and Liabilities

Intangible assets

Equity

Property, plant, and equipment

Non-current liabilities

Long-term investments

Current liabilities

Current assets
Slide
4-33

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Intangible Assets
Assets that do not have physical substance.

Slide
4-34

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Property, Plant, and Equipment

Long useful lives.
Currently used in operations.
Depreciation - allocating the cost of assets to a number of
years.
Accumulated depreciation - total amount of depreciation
expensed thus far in the assets life.

Slide
4-35

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Property, Plant, and Equipment

Illustration 4-20

(in billions)

Slide
4-36

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Long-Term Investments
Investments in stocks and bonds of other companies.
Investments in long-term assets such as land or buildings that
a company is not currently using in its operating activities.

Slide
4-37

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Current Assets
Assets that a company expects to convert to cash or
use up within one year or the operating cycle,
whichever is longer.
Operating cycle is the average time it takes from the
purchase of inventory to the collection of cash from
customers.

Slide
4-38

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Current Assets
Illustration 4-22

Slide
4-39

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Review Question
Cash, and other resources that are reasonably expected to
be realized in cash or sold or consumed in the business
within one year or the operating cycle, are called:
a. Current assets.
b. Intangible assets.
c. Long-term investments.
d. Property, plant, and equipment.

Slide
4-40

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Equity
Proprietorship - one capital account.
Partnership - capital account for each partner.
Corporation Share Capital and Retained Earnings.
Illustration 4-23

Slide
4-41

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Non-current Liabilities
Obligations a company expects to pay after one year.

Slide
4-42

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

Slide
4-43

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Review Question
Which of the following is not a non-current liability?
a. Bonds payable
b. Current maturities of long-term obligations
c. Long-term notes payable
d. Mortgages payable

Slide
4-44

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Current Liabilities
Obligations the company is to pay within the coming
year.
Usually list notes payable first, followed by accounts
payable. Other items follow in order of magnitude.
Liquidity - ability to pay obligations expected to be
due within the next year.

Slide
4-45

SO 6 Identify the sections of a classified statement of financial position.

The
The Classified
Classified Statement
Statement of
of Financial
Financial Position
Position

Current Liabilities

Slide
4-46

SO 6 Identify the sections of a classified statement of financial position.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle

Key Differences
Procedures used to prepare the worksheet are the same for
all companies under both IFRS and GAAP.
Both GAAP and IFRS are consistent regarding the type of
financial statements prepared.
IFRS requires that specific items be reported on the
statement of financial position, whereas no such general
standard exists in GAAP.

Slide
4-47

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle

Similarities

Slide
4-48

Both require note disclosures on accounting policies and

judgments.

Comparative prior period information must be presented

and financial statements must be prepared annually.

Current/noncurrent classification for assets and liabilities is

normally required.

Like IFRS, a classified statement of financial position is

usually used under GAAP.

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle

Key Differences
IFRS companies may report PP&E first in their statements of
financial position. This presentation is not used under
GAAP.
Under IFRS, companies, under certain conditions, can
report property, plant and equipment at cost or at fair value.
While the use of the term reserve is discouraged by GAAP,
it is used extensively under IFRS.

Slide
4-49

Understanding
Understanding U.S.
U.S. GAAP
GAAP
Completing the Accounting Cycle

Looking to the Future

The IASB and FASB are working on a project to converge
their standards related to financial statement presentation.
Proposal is that each of the statements will be organized in
the same format.
The same classifications used in the statement of financial
position would also be used in the income statement and
the statement of cash flows.

Slide
4-50

APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Reversing Entries
It is often helpful to reverse some of the adjusting entries
before recording the regular transactions of the next
period.
Companies make a reversing entry at the beginning of
the next accounting period.
Each reversing entry is the exact opposite of the
adjusting entry made in the previous period.
The use of reversing entries does not change the
amounts reported in the financial statements.
Slide
4-51

SO 7 Prepare reversing entries.

APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration: To illustrate the optional use of reversing entries for
accrued expenses, we will use the salaries expense transactions for
Pioneer Advertising Agency.
1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries
earned between October 15 and October 26.
2. October 31 (adjusting entry): Salaries earned between October
29 and October 31 are $1,200. The company will pay these in the
November 9 payroll.
3. November 9 (subsequent salary entry): Salaries paid are $4,000.
Of this amount, $1,200 applied to accrued wages payable and
$2,800 was earned between November 1 and November 9.
Slide
4-52

SO 7 Prepare reversing entries.

APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration 4A-1

With Reversing Entries

(per appendix)
Oct. 26

Initial Salary Entry

Same entry
Adjusting Entry

Oct. 31

Same entry

Oct. 31

Closing Entry
Same entry
Reversing Entry

Nov. 1

Salaries payable
Salaries expense

1,200
1,200

Subsequent Salary Entry

Nov. 9

Slide
4-53

Salaries expense
Cash

4,000
4,000

SO 7 Prepare reversing entries.

APPENDIX
APPENDIX Reversing
Reversing Entries
Entries
Illustration 4A-2
Postings with
reversing
entries

Slide
4-54

SO 7 Prepare reversing entries.

Copyright
Copyright
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Slide
4-55